Foreign Direct Investment And Foreign Indirect Investment

FOREIGN DIRECT INVESTMENT(FDI):

Any non-resident investment in an Indian company is direct foreign investment. Foreign direct investment is in contrast to portfolio investment, which is a passive investment in the securities of another country, such as stocks and bonds.

The Indian system of administration and governance is impregnated with flaws like shortages of power, bureaucratic hassles, political uncertainty, and infrastructural deficiencies. In spite of all these political shortcomings, India is perceived to be one of the most lucrative grounds for investing, in the eyes of the wealthy European as well as American investors. This is the true reason why the researches made into the sector establishes more and more foreign investors coming to India and investing liberally into the various sectors of the Indian economy.

Various Indian market sectors have experienced a recent progress and boom, owing to the investment made in them as well as due to the relaxation of rules and regulations that had been levied on the foreign direct investment in India, by the Indian government. The Indian law permitted only the non-resident Indians (NRIs) or persons of Indian origin (PIOs) to make foreign direct investment in India. Even these people had been levied with many restrictions. With these restrictions, a host of foreign investors and companies stormed India with their products, services and business ideas along with their money. This money in turn helped the Indian economy to grow in volume as well as statures.

Many major industrialists and business tycoons expanded their businesses to India with the boom of foreign direct investment in India. Japanese and Korean firms and businesses houses have always trusted for foreign direct investment. Many of the Indian sectors have thus benefited and in turn given lucrative returns to the investors as well. This is the reason why most of the investors keep looking towards India as a venue for investment.

FOREIGN INDIRECT INVESTMENT(FII):

If the Indian investing company has foreign investment in it,an Indian company would have indirect foreign investment. Foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets.

The foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are owned and controlled by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens. The indirect foreign investment in only the 100% owned subsidiaries of investing companies, will be limited to the foreign investment in the investing company. This exception is made since the downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by the holding company. This exception is strictly for those cases where the entire capital of the downstream subsidiary is owned by the holding company.

To calculate the foreign indirect investment, we have company X and company Y. The following would be the method of calculation:

(a) Where Company Y has foreign investment less than 50%- Company X would not be taken as having any indirect foreign investment through Company Y.

(b) Where Company Y has foreign investment of say 75% and:

 1)invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X.

2)Invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%.

3)Where Company X is a wholly owned subsidiary of Company Y then only 75% would be treated as indirect foreign equity and the balance 25% would be treated as resident held equity. The indirect foreign equity in Company X would be computed in the ratio of 75: 25 in the total investment of Company Y in Company X.